How Do Major European Banks Fare In Terms Of Meeting Core Capital Ratio Targets?

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The growing importance of the common equity tier 1 (CET1) ratio figure in the wake of stricter regulations adopted by financial regulators has forced all major banks to work on strengthening this metric. As a result, all the major European banks have already been able to achieve CET1 ratios in excess of the target figures they need to achieve by 2019. Notably, Swiss banking giant UBS’s CET1 figure was 380 basis points (3.8% points) above the required level, while the gap is only 30 basis points (0.3% points) for Deutsche Bank.

CET1_QA_EU_16Q3

The figures at the end of Q3 2016 and the 2019 fully phased-in target compiled here are as reported by each of these banks in their latest 10-Q SEC filing.

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The CET1 ratio is a key quantitative measure used by financial regulators to gauge the strength of a bank. Additionally, regulators use this metric as a part of their annual stress tests to ensure that a bank’s capital plans for a year do not undermine their capital position in the event of a downturn. A larger difference between the current and target CET1 ratios gives a bank more leeway in handing out cash to investors in the form of share repurchases and dividend hikes.

It should be noted that a large number of the European banks are struggling to ensure that they have a sufficient capital buffer. UBS, however, has done quite well to revamp its business model and shore up its balance sheet – something that has helped the Swiss bank achieve the highest CET1 ratio figures among all major European banks. The only major bank to fare better than UBS globally is Morgan Stanley, which had an excess capital buffer of 580 basis points (5.8% points) at the end of Q3 2016.

We represent dividend payouts and share repurchases in our analysis of UBS in the form of an adjusted dividend payout rate, as shown in the chart below. Note that we represent this payout rate as 0% in the chart for each year over 2008-12 as the bank did not pay out any dividends. You can understand how a change in UBS’s adjusted payout ratio affects its share value by making changes here.

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